Not a lot has changed for the UK fund investor over the past two years, according to the results of Morningstar's second Global Fund Investor Survey, which measures the experiences of fund investors in 22 countries across the North America, Europe, Asia, and Africa. Much is written about equity shareholders’ rights but very little--virtually nothing--about the rights and experiences of investors who buy funds. Morningstar's survey attempts to highlight that investors have rights, and to kickstart dialogue between fund providers, distributors and regulators.
Countries are evaluated in four categories: Regulation and Taxation, Disclosure, Fees and Expenses, and Sales and Media. Both questions and answers were weighted to give greater importance to factual, empirical answers as well as the high-priority issues of fees, taxes, and transparency. Morningstar assigned countries a letter grade for each category and then added the category scores to produce an overall country grade. We gathered information from available public data and from interviews with local Morningstar analysts.
As in the 2009 survey, the UK received an overall grade of C+: a middle-of-the-road grade between the As of the United States and Singapore and the D- of New Zealand. However, in the area of Investor Protection, the UK received a grade of B+, a notch higher than the B awarded in the 2009 Morningstar study and just shy of an overall A in this area. The UK also received B grades in the areas of Transparency in Prospectus and Reports and also in Taxation. Along with France, a B grade for taxation is the highest awarded for any European country and acknowledges a UK taxation system that encourages long-term investing. All A grades in the area of Taxation were taken by countries with no capital gains or ordinary income taxes.
Morningstar’s evaluation of investor-friendly practices in fund markets worldwide identified the United States and Singapore as the best markets for fund investors. New Zealand scored the worst, but has been showing signs of improvement since Morningstar published its first study in May 2009. This year’s study also includes first-time evaluations of fund investor experiences in Belgium, India, Norway, South Africa, Sweden, and Thailand.
“With this report we hope to advance the dialogue about best practices from the perspective of the mutual-fund shareholder," commented John Rekenthaler, Vice President of Research for Morningstar. "Just as with stocks, some jurisdictions offer relatively friendly investment climates for mutual fund owners and others less so," he added, while pointing out that this survey highlights the strengths and weaknesses of 22 fund market places.
The United States received an A in the areas of disclosure, fees and expenses, and sales and marketing, but a C+ in the area of regulation and taxation. U.S. Government bodies assigned with investor protection have struggled to identify violations in a timely manner, such as the Madoff ponzi scheme. Additionally, the United States is one of only five countries to tax fund investors on capital gains earned within fund shares, and its tax rates for short-term capital gains are among the highest in this study.
Singapore received As for regulation and taxation as well as for sales and media. The country has a strong regulatory regime with an absence of most investment taxes. Regulations ban sales practices that are most rife for abuse, and disclosure is good. However, Singaporean funds could carry lower costs.
New Zealand scored the worst overall, largely because of low grades in the areas of disclosure as well as regulation and taxation. While the tax structure continues to be relatively unfavourable to fund investors in New Zealand, it is worth noting that there may be changes on the horizon in terms of disclosure and regulation. The Securities Commission and the Ministry of Economic Development have recently begun reviewing the uniformity of disclosure of fees, commission structures, adviser incentives, and other regulatory changes. In late May 2010, the New Zealand Commerce Minister also announced the establishment of a single regulator, the Financial Markets Authority (FMA), ahead the first full review of the Securities Act in more than 30 years.
Of the new countries reviewed in this year’s study, Thailand had the highest overall score of A-. Strong disclosure and low fund fees boosted Thailand’s score. However, limited fund availability, sales contests, and poor media coverage tempered the rating. South Africa scored at the bottom of the new countries evaluated with a C-. Regulation that limits foreign investment reduces the availability of foreign-domiciled funds and constricts the number of investment strategies that managers based in South Africa can undertake. South Africa also scored poorly for disclosure. Historical expense ratio information, detailed fees, trading costs, and portfolio holdings were generally lacking or difficult to obtain.
Click here to read the full copy of Morningstar’s Global Investor Experience Study, including all countries' category gradings.
